For three years, the car dealer, with locations in Santa Ana and Huntington Beach, has operated at a loss. Owner Lou Sobh, a successful Mexican immigrant, has spent $4 million to keep it afloat. Last month, he closed a lot in Anaheim.

“It’s really been a difficult couple of weeks for me personally,” sighs Vice President and General Manager Mike Stout.

Then the state made it worse by unlawfully withholding their money.

You see, in July 2006, Saturn was legally entitled to a $50,000 refund from the state tax collector, the Board of Equalization. The problem was, Saturn, like many small businesses, didn’t know it.

So for months, Saturn struggled until the board finally called. But instead of writing a check, the board announced it was auditing Saturn. Never did the tax collector mention the money, not even after the dealer passed with a clean bill of health.

In fact, Saturn didn’t learn of the refund until just a few weeks ago, after Orange County’s representative on the board, Michelle Steel, investigated the refund program and found the state was wrongly withholding millions from small businesses.

Steel made sure that Saturn got its refund – more than a year and a half late – but that’s the best she can do. If Saturn was late on its taxes, it would owe interest, but the same doesn’t apply to the state.

“If we make a mistake, they’re going to charge us thousands and thousands and thousands,” said Stout, who thanks to Steel finally received the $50,000 two weeks ago. “Life is unfair, but my Lord! This is our government. …

“I certainly don’t think this is a mistake. Somebody had to have known about (the refund),” Stout said.

Steel, a Republican, is equally disturbed by what she’s found. In her district alone, $4 million was owned to 600 businesses, “a high percentage” of which are owned by immigrants, she said. A subsequent investigation found more than 2,000 businesses statewide are eligible to receive $38.8 million in refunds.

“For the BOE, I think, their first priority is always collecting taxes. Returning money is such a small (priority),” Steel said. She told me it’s possible the board may be less focused on enforcing the law and more on making money.

“I really cannot guess at what they are doing,” she said, “but … at the tax agency they want to show how much they are raising.”

Board staff maintains it didn’t mean to withhold the refunds, but admits its process for distributing them may be flawed.

State law requires that small businesses post a security deposit of $2,000 to $50,000 as a hedge against potential tax liabilities. If the business has a clean record after three years, it’s supposed to get a full refund. Board spokeswoman Anita Gore told me part of the problem is that the tax collector only reviewed the refund list every six months.

Staff announced at a board meeting last week that money would be returned by the end of this month. Policies will be revised in the coming weeks.

“It certainly isn’t intentional,” Gore said when asked why the board withheld the refunds. “There’s no reason for board employees to hold onto someone else’s money.” She told me it’s just a problem of policies and procedures.

That may be true, but I have evidence that could suggest otherwise.

I’ve obtained an internal board memo from the late 1990s that explicitly informs staffers that security deposits should be released, under Section 6701 of the state Revenue and Taxation Code, “after a three-year period.”

However, I also have a Nov. 7, 2007, letter from a board staffer that states, “(T)he law does not specify a period of time for which the security may be held. In most cases, the Board holds security until the business ceases to operate and the seller’s permit is cancelled.”

Gore, the board spokeswoman, told me this week the letter could be technically accurate if the business didn’t have a clean record after three years, but acknowledged it was poorly written. She also noted that $38 million in refunds is a small piece of the $53 billion the board collects annually.

“There’s nothing in it for staff to collect more money than is due,” she said.

Fair enough, but with the state facing a $14 billion budget deficit, it would be easy to wonder whether the tax collector isn’t more concerned about raising revenues than serving the public.

“There clearly is more pressure being exerted from all sides to find every dollar,” said David Kline, spokesman for the California Taxpayers’ Association.

Indeed, board press releases and reports have focused lately on raising revenues by strengthening tax enforcement and closing “tax gap” – the difference between taxes owed and tax paid – which was estimated to be about $2 billion in 2005-06.

In July, a press release from board then-Vice Chair Judy Chu touted a new inspection program that had uncovered “nearly 1,000” retailers in Los Angeles who didn’t hold “seller’s permits” necessary for tax collection. The problem is, inspectors took 10 months and visited 25,460 businesses to find those violators – a success rate of less than 4 percent.

And just last month, when the governor proposed slashing 10 percent from all state departments, then-Board Chairwoman Betty T. Yee’s office noted that the plan “provides a total of $34.6 million and 301 new or continuing limited-term positions for revenue-generating initiatives to address tax compliance issues and to close the state’s tax gap… The positions will generate $129 million in total funds in 2008-09, increasing to $193 million in total in 2009-10.”

What does that sound like to you? Is that agency so focused on raising money that it would withhold a refund to pad its returns?

“I definitely think so,” said Stout, the Saturn GM. “What else could be the motivation? I think we’ve ruled out a mistake.”

Brian Joseph covers Capitol issues for the Register. His Capitol Watchdog column focuses on government practices. 916-449-6046 or bjoseph@ocregister.com.

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